QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
September 30, 2012

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-16783

___________________________________________________

VCA Antech, Inc.

(Exact name of registrant as specified in its charter)

Delaware

95-4097995

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

12401 West Olympic Boulevard

Los Angeles, California 90064-1022

(Address of principal executive offices)

(310) 571-6500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ].

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer [X]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [ ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value,
87,829,066
shares as of November 5, 2012.

Common stock, par value $0.001, 175,000 shares authorized, 87,829 and 86,796 shares outstanding as of September 30, 2012 and December 31, 2011, respectively

88

87

Additional paid-in capital

382,479

361,715

Retained earnings

849,260

745,658

Accumulated other comprehensive income

2,883

418

Total VCA Antech, Inc. stockholders’ equity

1,234,710

1,107,878

Noncontrolling interests

11,050

10,074

Total equity

1,245,760

1,117,952

Total liabilities and equity

$

2,201,285

$

1,995,368

The accompanying notes are an integral part of these condensed, consolidated financial statements.

1

VCA Antech, Inc. and Subsidiaries

Condensed, Consolidated Income Statements

(Unaudited)

(In thousands, except per share amounts)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2012

2011

2012

2011

Revenue

$

433,613

$

385,135

$

1,281,450

$

1,116,363

Direct costs

334,432

294,998

988,283

849,616

Gross profit

99,181

90,137

293,167

266,747

Selling, general and administrative expense

37,608

32,488

115,656

85,334

Net loss (gain) on sale of assets

387

(192

)

1,022

(43

)

Operating income

61,186

57,841

176,489

181,456

Interest expense, net

4,295

4,222

12,746

12,816

Debt retirement costs

—

2,764

—

2,764

Business combination adjustment gain

—

—

(5,719

)

—

Other (income) expense

(284

)

8

(639

)

(1

)

Income before provision for income taxes

57,175

50,847

170,101

165,877

Provision for income taxes

21,533

19,488

62,360

63,957

Net income

35,642

31,359

107,741

101,920

Net income attributable to noncontrolling interests

1,605

1,190

4,139

3,300

Net income attributable to VCA Antech, Inc

$

34,037

$

30,169

$

103,602

$

98,620

Basic earnings per share

$

0.39

$

0.35

$

1.18

$

1.14

Diluted earnings per share

$

0.38

$

0.35

$

1.17

$

1.13

Weighted-average shares outstanding for basic earnings per share

87,773

86,697

87,554

86,531

Weighted-average shares outstanding for diluted earnings per share

88,654

87,253

88,589

87,293

The accompanying notes are an integral part of these condensed, consolidated financial statements.

2

VCA Antech, Inc. and Subsidiaries

Condensed, Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2012

2011

2012

2011

Net income
(1)

$

35,642

$

31,359

$

107,741

$

101,920

Other comprehensive income:

Foreign currency translation adjustments

2,615

(669

)

2,173

(373

)

Unrealized gain (loss) on foreign currency

432

(608

)

479

(371

)

Tax (expense) benefit

(169

)

237

(187

)

145

Other comprehensive income (loss)

2,878

(1,040

)

2,465

(599

)

Total comprehensive income

38,520

30,319

110,206

101,321

Comprehensive income attributable to noncontrolling interests
(1)

1,605

1,190

4,139

3,300

Comprehensive income attributable to VCA Antech, Inc

$

36,915

$

29,129

$

106,067

$

98,021

____________________________

(1)

Includes approximately
$2.1 million
and
$1.5 million
of net income related to redeemable and mandatorily redeemable noncontrolling interests for the
nine
months ended
September 30, 2012
and
September 30, 2011
, respectively.

The accompanying notes are an integral part of these condensed, consolidated financial statements.

The accompanying notes are an integral part of these condensed, consolidated financial statements.

4

VCA Antech, Inc. and Subsidiaries

Condensed, Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Nine Months Ended
September 30,

2012

2011

Cash flows from operating activities:

Net income

$

107,741

$

101,920

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

56,882

41,386

Amortization of debt issue costs

961

1,169

Provision for uncollectible accounts

4,437

4,510

Debt retirement costs

—

2,764

Business combination adjustment gain

(5,719

)

—

Net loss (gain) on sale of assets

1,022

(43

)

Share-based compensation

10,466

6,610

Deferred income taxes

14,119

14,649

Excess tax benefit from exercise of stock options

(358

)

(963

)

Other

(838

)

(489

)

Changes in operating assets and liabilities:

Trade accounts receivable

(5,079

)

(7,018

)

Inventory, prepaid expense and other assets

(6,727

)

(9,806

)

Accounts payable and other accrued liabilities

3,161

(8,328

)

Accrued payroll and related liabilities

10,007

8,523

Income taxes

(1,636

)

8,707

Net cash provided by operating activities

188,439

163,591

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(108,031

)

(190,363

)

Real estate acquired in connection with business acquisitions

(1,602

)

(1,900

)

Property and equipment additions

(55,257

)

(43,275

)

Proceeds from sale of assets

112

447

Other

(1,583

)

(723

)

Net cash used in investing activities

(166,361

)

(235,814

)

Cash flows from financing activities:

Repayment of debt

(52,040

)

(90,945

)

Proceeds from issuance of long-term debt

50,000

150,000

Proceeds from revolving credit facility

50,000

50,000

Repayment of revolving credit facility

(50,000

)

(50,000

)

Payment of financing costs

(122

)

(2,944

)

Distributions to noncontrolling interest partners

(2,802

)

(1,959

)

Proceeds from issuance of common stock under stock option plans

3,322

2,596

Excess tax benefit from exercise of stock options

358

963

Stock repurchases

(3,897

)

(2,663

)

Other

(1,273

)

(345

)

Net cash (used in) provided by financing activities

(6,454

)

54,703

Effect of currency exchange rate changes on cash and cash equivalents

386

(363

)

Increase (decrease) in cash and cash equivalents

16,010

(17,883

)

Cash and cash equivalents at beginning of period

63,651

97,126

Cash and cash equivalents at end of period

$

79,661

$

79,243

The accompanying notes are an integral part of these condensed, consolidated financial statements.

5

VCA Antech, Inc. and Subsidiaries

Condensed, Consolidated Statements of Cash Flows - Continued

(Unaudited)

(In thousands)

Nine Months Ended
September 30,

2012

2011

Supplemental disclosures of cash flow information:

Interest paid

$

11,614

$

12,214

Income taxes paid

$

48,671

$

40,601

Supplemental schedule of noncash investing and financing activities:

Detail of acquisitions:

Fair value of assets acquired

$

187,515

$

241,688

Fair value of pre-existing investment in AVC

(11,850

)

—

Noncontrolling interest

(8,161

)

—

Cash paid for acquisitions

(108,031

)

(189,255

)

Cash paid to debt holders

(25,915

)

(26,048

)

Issuance of common stock for acquisitions

(10,500

)

—

Contingent consideration

(934

)

(481

)

Holdbacks

(2,525

)

(800

)

Liabilities assumed

$

19,599

$

25,104

The accompanying notes are an integral part of these condensed, consolidated financial statements.

6

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements

September 30, 2012

(Unaudited)

1.

Nature of Operations

Our company, VCA Antech, Inc. (“VCA”) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with the following five operating segments: animal hospitals (“Animal Hospital”), veterinary diagnostic laboratories (“Laboratory”), veterinary medical technology (“Medical Technology”), Vetstreet and ThinkPets.

Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At
September 30, 2012
, we operated
601
animal hospitals throughout
41
states and in three Canadian provinces.

We operate a full-service veterinary diagnostic laboratory network serving all
50
states and certain areas in Canada. Our laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At
September 30, 2012
, we operated
55
laboratories of various sizes located strategically throughout the United States and certain areas in Canada.

Our Medical Technology business sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, provides consulting and mobile imaging services, and sells software and ancillary services to the veterinary market.

The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks, and the number of daylight hours.

2.

Basis of Presentation

Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the
three and nine
months ended
September 30, 2012
are not necessarily indicative of the results to be expected for the full year ending December 31, 2012. For further information, refer to our consolidated financial statements and notes thereto included in our 2011 Annual Report on Form 10-K.

The preparation of our condensed, consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed, consolidated financial statements and notes thereto. Actual results could differ from those estimates.

7

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

3.

Goodwill and Other Intangible Assets

Goodwill

The following table presents the changes in the carrying amount of our goodwill for the
nine
months ended
September 30, 2012
(in thousands):

Animal

Hospital

Laboratory

All Other

Total

Balance as of December 31, 2011

$

1,035,401

$

96,810

$

105,396

$

1,237,607

Goodwill acquired

120,505

34

11,194

131,733

Foreign translation adjustment

2,053

23

—

2,076

Other
(1)

(4,271

)

—

(1,028

)

(5,299

)

Balance as of September 30, 2012
(2)

$

1,153,688

$

96,867

$

115,562

$

1,366,117

____________________________

(1)

Other includes acquisition-price adjustments, which consist primarily of an adjustment related to capital leases and buy-outs.

(2)

Net of accumulated impairment losses of $
21.3 million
recorded in 2011, all related to our medical technology business, included in "All Other" in the above table.

We had
no
impairment losses during the
nine
months ended
September 30, 2012
.

Other Intangible Assets

Our amortizable intangible assets at
September 30, 2012
and
December 31, 2011
are as follows (in thousands):

The following table summarizes the aggregate consideration for the
24
independent animal hospitals acquired during the
nine
months ended
September 30, 2012
, and the preliminary allocation of the acquisition price (in thousands):

Consideration:

Cash

$

51,744

Holdback

1,475

Earnout contingent consideration

934

Fair value of total consideration transferred

$

54,153

Allocation of the Purchase Price:

Tangible assets

$

1,995

Identifiable intangible assets

9,184

Goodwill
(1)

42,974

Total

$

54,153

____________________________

(1)
We expect that $
40.0 million
of the goodwill recorded for these acquisitions, as of
September 30, 2012
, will be deductible for income tax purposes.

In addition to the purchase price listed above, are cash payments made for real estate acquired in connection with our purchase of animal hospitals, totaling $
1.6 million
for the
nine
months ended
September 30, 2012
.

AVC

On January 31, 2012, we increased our investment in AVC by approximately CDN
$81 million
(approximately US
$81 million
) becoming the sole non-veterinarian shareholder of AVC. At the time of the additional investment, AVC operated
44
animal hospitals in three Canadian provinces, offering services ranging from primary care, to specialty referral services and 24-hour emergency care. This investment and planned additional investments in AVC will facilitate our continued expansion in the Canadian market. At the time of the investment, AVC had annualized revenue of approximately CDN
$95 million
(approximately US
$95 million
). Our consolidated financial statements reflect the operating results of AVC since January 31, 2012.

10

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

4.

Acquisitions, continued

The following table summarizes the total investment and the preliminary allocation of the investment in AVC (in thousands):

(2)
As of
September 30, 2012
, we expect that approximately $
362,000
of the goodwill recorded for this acquisition will be deductible for income tax purposes.

Acquisition-related costs, included in corporate selling, general and administrative expense in our income statement, for the
three
and
nine
months ended
September 30, 2012
, were approximately
$161,000
and
$500,000
, respectively.

The allocation of the additional investment is preliminary, because certain items have not been completed or finalized, including but not limited to, the valuation of assets, primarily property and equipment.

AVC is reported within our Animal Hospital reportable segment.

The pro forma impact on revenue and earnings have not been disclosed as the amounts were immaterial to the financial statements as a whole.

ThinkPets, Inc ("ThinkPets)

On February 1, 2012, we acquired
100%
interest in ThinkPets for
$21 million
, payable by delivery of
473,389
shares of VCA common stock and
$10.5 million
in cash. We intend to combine the operations of ThinkPets with our Vetstreet business, which we expect will improve the products and services it offers to clients of both companies. Our consolidated financial statements reflect the operating results of ThinkPets since February 1, 2012.

11

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

4.

Acquisitions, continued

The following table summarizes the preliminary purchase price and the preliminary allocation of the investment in ThinkPets (in thousands):

(2)
As of
September 30, 2012
, we expect that approximately $
821,000
of the goodwill recorded for this acquisition will be deductible for income tax purposes.

Acquisition-related costs, included in corporate selling, general and administrative expense in our income statement, for the
three
and
nine
months ended
September 30, 2012
, were approximately
$35,000
and
$1.0 million
, respectively.

The allocation of the purchase price is preliminary because certain items have not been completed or finalized, including but not limited to, the valuation of assets, including intangible assets, and liabilities.

The pro forma impact on revenue and earnings have not been disclosed as the amounts were immaterial to the financial statements as a whole.

5.

Other Accrued Liabilities

Other accrued liabilities consisted of the following (in thousands):

September 30,
2012

December 31,
2011

Deferred revenue

$

9,481

$

7,025

Accrued health insurance

6,275

5,553

Deferred rent

4,087

3,626

Accrued consulting fees

2,886

2,886

Holdbacks and earnouts

3,795

2,250

Customer deposits

2,681

2,281

Accrued lab service rebates

426

332

Other

26,721

20,015

$

56,352

$

43,968

12

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

6.

Long-Term Obligations

Senior Credit Facility

On January 25, 2012, we executed an amendment (the "First Amendment") to our Amended and Restated Credit and Guaranty Agreement entered into as of August 16, 2011 (our "Senior Credit Facility"). On January 24, 2012, we issued new term loans in the aggregate principal amount of
$50.0 million
. The First Amendment replenished the aggregate principal amount of uncommitted incremental facilities by
$50.0 million
, permitting us to request up to an aggregate principal amount of
$100.0 million
in uncommitted incremental facilities. The funds borrowed from the Incremental Facility were used to fully repay amounts borrowed to fund an additional investment in Associate Veterinary Clinics (1981) LTD ("AVC") on February 1, 2012. In connection with the First Amendment we incurred
$122,000
in financing costs, of which approximately
$47,000
were expensed as a component of selling, general and administrative expenses and
$75,000
were capitalized as deferred financing costs.

The following table summarizes our long-term obligations at
September 30, 2012
and
December 31, 2011
(in thousands):

September 30,
2012

December 31,
2011

Revolver

$

—

$

—

Senior term notes at the adjusted Eurodollar rate + 1.75% (1.97% at September 30, 2012)

600,313

573,984

Other debt and capital lease obligations

39,128

44,869

Total debt obligations

639,441

618,853

Less - current portion

(34,996

)

(32,571

)

$

604,445

$

586,282

Interest Rate.
In general, borrowings under the senior term notes and the revolving credit facility bear interest, at our option, on either:

•

the base rate (as defined below) plus the applicable margin. The applicable margin for a base rate loan is an amount equal to the applicable margin for Eurodollar rate (as defined below) minus 1.00%; or

•

the adjusted Eurodollar rate (as defined below), plus a margin of
1.75%
(Level II, see table below), per annum until the date of delivery of the compliance certificate and the financial statements, for the period ended
September 30, 2012
, at which time the applicable margin will be determined by reference to the leverage ratio in effect from time to time as set forth in the following table:

Level

Leverage Ratio

Applicable Margin for

Eurodollar Rate Loans

Applicable Revolving

Commitment Fee %

I

≥ 2.50:1.00

2.25%

0.50%

II

< 2.50:1.00 and ≥ 1.75:1.00

1.75%

0.375%

III

< 1.75:1.00 and ≥ 1.00:1.00

1.50%

0.25%

IV

< 1.00:1.00

1.25%

0.20%

The base rate for the senior term notes is a rate per annum equal to the greatest of Wells Fargo Bank, N.A. ("Wells Fargo") prime rate in effect on such day, the Federal funds effective rate in effect on such day plus 0.5% and the adjusted Eurodollar rate for a one-month interest period commencing on such day plus 1.0%. The adjusted Eurodollar rate is defined as the rate per annum obtained by dividing (1) the rate of interest offered to Wells Fargo on the London interbank market by (2) a percentage equal to 100% minus the stated maximum rate of all reserve requirements applicable to any member bank of the Federal Reserve System in respect of “Eurocurrency liabilities.”

13

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

6.

Long-Term Obligations, continued

Maturity and Principal Payments
. The Amended and Restated senior term notes mature on
August 19, 2016
. Principal payments on the senior term notes are paid quarterly in the amount of (i)
$7.9 million
for the first four quarters beginning on December 31, 2012, (ii)
$11.8 million
for the two years following, and (iii)
$15.8 million
for the three quarters prior to maturity, at which time the remaining balance is due. The following table sets forth the remaining scheduled principal payments for our senior term notes (in thousands):

Remainder of 2012

$

7,891

2013

35,508

2014

47,344

2015

51,289

2016

458,281

Total

$

600,313

The revolving credit facility matures on
August 19, 2016
. Principal payments on the revolving credit facility are made at our discretion with the entire unpaid amount due at maturity.

Guarantees and Security.
We and each of our wholly-owned subsidiaries guarantee the outstanding debt under our senior credit facility. These borrowings, along with the guarantees of the subsidiaries, are further secured by substantially all of our consolidated assets. In addition, these borrowings are secured by a pledge of substantially all of the capital stock, or similar equity interests, of our wholly-owned subsidiaries.

7.

Fair Value Measurements

Fair Value of Financial Instruments

The FASB accounting guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying condensed, consolidated balance sheets. Fair value as defined by the guidance is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents.
These balances include cash and cash equivalents with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.

Receivables, Less Allowance for Doubtful Accounts, Accounts Payable and Certain Other Accrued Liabilities.
Due to their short-term nature, fair value approximates carrying value.

Long-Term Debt.
The fair value of debt at
September 30, 2012
and
December 31, 2011
is based upon the ask price quoted from an external source, which is considered a Level 2 input.

At
September 30, 2012
and
December 31, 2011
, we did not have any material applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.

8.

Share-Based Compensation

Stock Option Activity

A summary of our stock option activity for the
nine
months ended
September 30, 2012
is as follows (in thousands):

Stock

Options

Weighted-

Average

Exercise

Price

Outstanding at December 31, 2011

3,776

$

16.92

Granted

462

$

18.94

Exercised

(225

)

$

14.78

Canceled

(52

)

$

14.84

Outstanding at September 30, 2012

3,961

$

17.25

Exercisable at September 30, 2012

2,828

$

17.27

Vested and expected to vest at September 30, 2012

3,931

$

17.26

There were
462,229
stock options granted during the
nine
months ended
September 30, 2012
, which had an estimated weighted-average grant date fair value of approximately
$5.48
. The aggregate intrinsic value of our stock options exercised during the three and
nine
months ended
September 30, 2012
was
$360,000
and $
1.6 million
, respectively, and the actual tax benefit realized on options exercised during these periods was
$141,000
and $
629,000
, respectively.

Calculation of Fair Value

The fair value of our options is estimated on the date of grant using the Black-Scholes option pricing model. We amortize the fair value of our options on a straight-line basis over the requisite service period. The following assumptions were used to determine the preliminary fair value of those options granted during the
nine
months ended
September 30, 2012
:

Expected volatility (1)

34.1

%

Weighted-average volatility (1)

34.1

%

Expected dividends

—

Expected term (years)

4.4

Risk-free rate (2)

0.62

%

_________________

(1)

We estimated the volatility of our common stock on the date of grant based on using both historical and implied volatilities.

(2)

The risk-free interest rate is based on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with equivalent remaining terms.

15

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

8.

Share-Based Compensation, continued

At
September 30, 2012
there was
$5.8 million
of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of
3.4 years
.

The compensation cost charged against income, for stock options for the
three
months ended
September 30, 2012
and
2011
, was
$362,000
and
$347,000
, respectively. The corresponding income tax benefit recognized was
$142,000
and
$136,000
, for the three months ended
September 30, 2012
and
2011
, respectively.

The compensation cost charged against income, for stock options for the
nine
months ended
September 30, 2012
and
2011
, was
$1.1 million
and
$1.0 million
, respectively. The corresponding income tax benefit recognized was
$433,000
and $
407,000
, for the
nine
months ended
September 30, 2012
and
2011
, respectively.

Nonvested Stock Activity

During the
nine
months ended
September 30, 2012
, we granted
68,900
shares of nonvested common stock as incentives to certain employees, including
14,308
shares for the annual directors' grant. Assuming continued service through each vesting date, the majority of these awards will vest in
four
equal annual installments beginning
February 2013
through
August 2016
.

Total compensation cost charged against income related to nonvested stock awards was $
2.1 million
and $
3.7 million
, for the three months ended
September 30, 2012
and
2011
, respectively. The corresponding income tax benefit recognized in the income statement was $
805,000
and
$1.5 million
, for the three months ended
September 30, 2012
and
2011
, respectively. Total compensation cost charged against income related to nonvested stock awards was $
9.1 million
and $
5.6 million
, for the
nine
months ended
September 30, 2012
and
2011
, respectively. The corresponding income tax benefit recognized in the income statement was
$3.6 million
and
$2.2 million
, for the
nine
months ended
September 30, 2012
and
2011
, respectively.

At
September 30, 2012
, there was
$14.8 million
of unrecognized compensation cost related to these nonvested shares, which will be recognized over a weighted-average period of
2.7 years
. A summary of our nonvested stock activity for the
nine
months ended
September 30, 2012
is as follows (in thousands, except per share amounts):

Shares

Grant Date

Weighted-

Average Fair

Value

Per Share

Outstanding at December 31, 2011

1,516

$

20.76

Granted

69

$

21.41

Vested

(437

)

$

22.15

Forfeited/Canceled

(1

)

$

42.33

Outstanding at September 30, 2012

1,147

$

20.27

Restricted Stock Unit Activity

During the three and
nine
months ended
September 30, 2012
, we granted
307,989
performance based restricted stock units ("RSUs") to our executive officers representing the right to receive one share of common stock. These RSUs will be earned upon achievement of the applicable performance criteria during the performance periods, from the fourth quarter 2012 through December 31, 2014, as set forth in the 2012 equity performance award agreements. Assuming achievement of the required performance conditions and continued service through each vesting date, these awards will vest in
four
equal annual installments beginning
August 2013
through
August 2016
.

Total compensation cost charged against income, related to RSU awards was
$279,000
, for the three and
nine
months ended
September 30, 2012
. The corresponding income tax benefit recognized in the income statement for the same periods were
$109,000
.

16

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

8.

Share-Based Compensation, continued

At
September 30, 2012
, there was
$5.6 million
of unrecognized compensation cost related to these RSUs, which will be recognized over a weighted-average period of
3.9
years.

9.

Calculation of Earnings per Share

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income attributable to VCA Antech, Inc. by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2012

2011

2012

2011

Net income attributable to VCA Antech, Inc

$

34,037

$

30,169

$

103,602

$

98,620

Weighted-average common shares outstanding:

Basic

87,773

86,697

87,554

86,531

Effect of dilutive potential common shares:

Stock options

461

445

523

593

Nonvested shares and units

420

111

512

169

Diluted

88,654

87,253

88,589

87,293

Basic earnings per share

$

0.39

$

0.35

$

1.18

$

1.14

Diluted earnings per share

$

0.38

$

0.35

$

1.17

$

1.13

For the three months ended
September 30, 2012
and
2011
, potential common shares of
1,220,547
and
2,104,547
, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

For the
nine
months ended
September 30, 2012
and
2011
, potential common shares of
1,100,645
and
1,139,567
, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

10.

Lines of Business

Our reportable segments are Animal Hospital and Laboratory. Our Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. Our other operating segments, included in “All Other” in the following tables, are our (i) Medical Technology business, which sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market and our (ii) Vetstreet business and our (iii) ThinkPets business. Vetstreet and ThinkPets provide online communications, professional education, marketing solutions to the veterinary community and an ecommerce platform for independent animal hospitals. These operating segments do not meet the quantitative requirements for reportable segments. Our operating segments are strategic business units that have different services, products and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards. We also operate a corporate office that provides general and administrative support services for our segments.

17

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

10.

Lines of Business, continued

The accounting policies of our segments are essentially the same as those described in the summary of significant accounting policies included in our
2011
Annual Report on Form 10-K. We evaluate the performance of our segments based on gross profit and operating income. For purposes of reviewing the operating performance of our segments all intercompany sales and purchases are generally accounted for as if they were transactions with independent third parties at current market prices.

The following is a summary of certain financial data for each of our segments (in thousands):

Animal

Hospital

Laboratory

All Other

Corporate

Intercompany

Eliminations

Total

Three Months Ended
September 30, 2012

External revenue

$

342,840

$

68,139

$

22,634

$

—

$

—

$

433,613

Intercompany revenue

—

13,147

5,466

—

(18,613

)

—

Total revenue

342,840

81,286

28,100

—

(18,613

)

433,613

Direct costs

288,588

44,109

19,217

—

(17,482

)

334,432

Gross profit

54,252

37,177

8,883

—

(1,131

)

99,181

Selling, general and administrative expense

7,745

7,285

8,764

13,814

—

37,608

Net (gain) loss on sale and disposal of assets

(77

)

—

464

—

—

387

Operating income (loss)

$

46,584

$

29,892

$

(345

)

$

(13,814

)

$

(1,131

)

$

61,186

Depreciation and amortization

$

13,953

$

2,544

$

2,611

$

806

$

(395

)

$

19,519

Property and equipment additions

$

14,069

$

1,342

$

1,660

$

2,120

$

(1,099

)

$

18,092

Three Months Ended
September 30, 2011

External revenue

$

303,203

$

67,588

$

14,344

$

—

$

—

$

385,135

Intercompany revenue

—

11,397

4,538

—

(15,935

)

—

Total revenue

303,203

78,985

18,882

—

(15,935

)

385,135

Direct costs

251,613

43,657

14,149

—

(14,421

)

294,998

Gross profit

51,590

35,328

4,733

—

(1,514

)

90,137

Selling, general and administrative expense

6,126

7,088

4,669

14,605

—

32,488

Net loss on sale and disposal of assets

(213

)

1

20

—

—

(192

)

Operating income (loss)

$

45,677

$

28,239

$

44

$

(14,605

)

$

(1,514

)

$

57,841

Depreciation and amortization

$

10,393

$

2,563

$

1,606

$

702

$

(334

)

$

14,930

Property and equipment additions

$

11,061

$

1,085

$

1,986

$

1,338

$

(629

)

$

14,841

18

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

10.

Lines of Business, continued

Animal

Hospital

Laboratory

All Other

Corporate

Intercompany

Eliminations

Total

Nine Months Ended
September 30, 2012

External revenue

$

1,001,247

$

212,562

$

67,641

$

—

$

—

$

1,281,450

Intercompany revenue

—

40,074

14,202

—

(54,276

)

—

Total revenue

1,001,247

252,636

81,843

—

(54,276

)

1,281,450

Direct costs

852,059

132,612

54,499

—

(50,887

)

988,283

Gross profit

149,188

120,024

27,344

—

(3,389

)

293,167

Selling, general and administrative expense

22,797

22,393

27,076

43,390

—

115,656

Net loss (gain) on sale and disposal of assets

316

(14

)

704

16

—

1,022

Operating income (loss)

$

126,075

$

97,645

$

(436

)

$

(43,406

)

$

(3,389

)

$

176,489

Depreciation and amortization

$

40,536

$

7,618

$

7,456

$

2,374

$

(1,102

)

$

56,882

Property and equipment additions

$

40,132

$

4,691

$

4,430

$

8,111

$

(2,107

)

$

55,257

Nine Months Ended
September 30, 2011

External revenue

$

864,476

$

209,639

$

42,248

$

—

$

—

$

1,116,363

Intercompany revenue

—

33,280

11,939

—

(45,219

)

—

Total revenue

864,476

242,919

54,187

—

(45,219

)

1,116,363

Direct costs

720,393

130,192

40,206

—

(41,175

)

849,616

Gross profit

144,083

112,727

13,981

—

(4,044

)

266,747

Selling, general and administrative expense

18,253

20,577

11,809

34,695

—

85,334

Net loss on sale and disposal of assets

(84

)

19

22

—

—

(43

)

Operating income (loss)

$

125,914

$

92,131

$

2,150

$

(34,695

)

$

(4,044

)

$

181,456

Depreciation and amortization

$

29,799

$

7,542

$

2,931

$

2,067

$

(953

)

$

41,386

Property and equipment additions

$

33,832

$

4,049

$

3,003

$

3,923

$

(1,532

)

$

43,275

At September 30, 2012

Total assets

$

1,623,778

$

244,811

$

219,630

$

139,314

$

(26,248

)

$

2,201,285

At December 31, 2011

Total assets

$

1,439,103

$

232,423

$

202,187

$

142,793

$

(21,138

)

$

1,995,368

19

VCA Antech, Inc. and Subsidiaries

Notes to Condensed, Consolidated Financial Statements (Continued)

September 30, 2012

(Unaudited)

11.

Commitments and Contingencies

We have certain commitments, including operating leases, purchase agreements and acquisition agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our
2011
Annual Report on Form 10-K. We also have contingencies as follows:

a.

Earn-Out Payments

We have contractual arrangements in connection with certain acquisitions that were accounted for under previous business combinations accounting guidance, whereby additional cash may be paid to former owners of acquired companies upon attainment of specified financial criteria, as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods expire and the attainment of criteria is established. If the specified financial criteria are attained, we will be obligated to pay approximately
$2.5 million
. Under the current business combination accounting guidance, contingent consideration, such as earn-out liabilities, is recognized as part of the consideration transferred on the acquisition date. A corresponding liability is recorded based on the fair value of the liability, if the fair value is known or determinable. The changes in fair value are recognized in earnings where applicable for each reporting period.

b.

Other Contingencies

We have certain contingent liabilities resulting from litigation and claims incident to the ordinary course of our business. We believe that the probable resolution of such contingencies will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

12.

Income Taxes

The effective tax rates of income attributable to VCA for the
three
and
nine
months ended
September 30, 2012
, were
38.7%
and
37.6%
, respectively, as compared to the
three
and
nine
months ended
September 30, 2011
, of
39.2%
and
39.3%
, respectively. The decreases in rates are, in part, due to the non-taxable gain of $
5.7 million
related to the increase in value of our historic noncontrolling interest in AVC, realized upon the acquisition of the remaining equity interest, in addition to lower tax rates in Canada.

13.

Noncontrolling Interests

We own some of our animal hospitals in partnerships with noncontrolling interest holders. We consolidate our partnerships in our consolidated financial statements because our ownership interest in these partnerships is equal to or greater than
50.1%
and we control these entities. We record noncontrolling interest in income of subsidiaries equal to our partners’ percentage ownership of the partnerships’ income. We also record changes in the redemption value of our redeemable noncontrolling interests in net income attributable to noncontrolling interests in our condensed, consolidated income statements. We reflect our noncontrolling partners’ cumulative share in the equity of the respective partnerships as either noncontrolling interests in equity, mandatorily redeemable noncontrolling interests in other liabilities, or redeemable noncontrolling interests in temporary equity (mezzanine).

a.

Mandatorily Redeemable Noncontrolling Interests

The terms of some of our partnership agreements require us to purchase the partner’s equity in the partnership in the event of the partner’s death. We report these redeemable noncontrolling interests at their estimated redemption value and classify them as liabilities due to the certainty of the related event. We recognize redemption value changes in the obligation in interest expense. At
September 30, 2012
and
December 31, 2011
, these liabilities were
$11.7 million
and
$3.1 million
, respectively, and are included in other liabilities in our consolidated balance sheets.

b.

Redeemable Noncontrolling Interests

We also enter into partnership agreements whereby the minority partner is issued certain “put” rights. These rights are normally exercisable at the sole discretion of the minority partner. We report these redeemable noncontrolling interests at their estimated redemption value and classify them in temporary equity (mezzanine). We recognize changes in the obligation in net